25 Dilemmas That Every Borrower, Every Stock Auditor and Every Banker Faces in Stock Audits and Nobody Talks About
Stock audits are supposed to be straightforward. The bank appoints an auditor. The auditor visits the borrower. The stock is verified. The drawing power is computed. The report is submitted. Everyone moves on.
That is how it looks in the textbook. In practice, every stock audit throws up situations where the right course of action is not obvious, where the interests of the three parties – the borrower, the auditor, and the bank – do not perfectly align, and where the professional framework provides broad principles but does not give a specific answer for the specific situation staring at you from across the table.
I call these dilemmas. Not problems – problems have solutions. Dilemmas have trade-offs. You choose one path and you accept the consequences that come with it. You choose the other path and you accept a different set of consequences. Neither path is costless. Neither is perfectly clean.
Over 36 years, first as a CFO sitting on the borrower’s side of the table and then as a practising stock auditor sitting on the other side, I have encountered these dilemmas repeatedly. They come up in every sector, in every size of borrower and with every type of bank. The specific numbers change. The specific facts change. The underlying tension does not.
I am deliberately not offering solutions in this article. Solutions depend on the specific facts, the specific engagement terms, the specific sanction letter, the specific ICAI pronouncement applicable at the time and the specific professional judgment of the auditor in the specific situation. What I am offering is recognition, an honest listing of the situations where the answer is not obvious, where reasonable professionals can disagree and where the auditor must think carefully before acting.
If you are a borrower, you will recognise these situations from your side of the experience. If you are a banker, you will recognise them from the reports you receive and the questions they leave unanswered. If you are an auditor, you will recognise them from the moments during an engagement when you put your pen down, lean back and think: what do I do now?
The 25 Dilemmas
Part A: Dilemmas the Borrower Faces
| # | The Dilemma | What Makes It Difficult |
| 1 | The stock auditor wants to visit the warehouse on a day when the factory is shut for maintenance and the warehouse supervisor is on leave. Rescheduling the visit by two days would mean the verification happens on a different date than the stock statement date. Allowing the visit without the warehouse supervisor means nobody on the borrower’s side can answer questions about specific inventory items, storage conditions, or recent movements. | If the borrower reschedules, the auditor may suspect the borrower is buying time to rearrange the stock. If the borrower allows the visit without the right people present, the verification may be incomplete and the auditor may note observations that would have been easily explained if the supervisor had been there. |
| 2 | The borrower genuinely believes that slow-moving stock of Rs 40 lakhs is fully saleable because a large order is expected next month. The auditor wants to exclude it from eligible stock for DP because it has not moved in 180 days. The borrower has no written confirmation of the expected order – it is a verbal assurance from the customer. | If the borrower insists on inclusion and the order does not materialise, the DP was overstated. If the borrower accepts the exclusion and the order does come through next month, the borrower was unnecessarily pushed into an overdrawn position for a month. The borrower cannot prove the order exists. The auditor cannot prove it does not. |
| 3 | The borrower’s Consent to Operate from the SPCB expired two months ago. The renewal application has been filed. The borrower has been told informally by the SPCB officer that the renewal will come through in a few weeks. The auditor is asking for the CTO document. The borrower is worried that disclosing the expiry will trigger alarm at the bank and potentially a facility recall. | If the borrower discloses, the bank may overreact to what is a routine renewal delay. If the borrower does not disclose and the auditor finds out independently, the borrower’s credibility is damaged far more than the CTO issue itself would have caused. |
| 4 | The borrower has received Rs 30 lakhs worth of goods from a supplier on the last day of the month but has not booked the invoice because it arrived two days later. The goods are physically in the warehouse. The stock statement includes them in inventory. But the corresponding creditor is not in the books. | If the borrower includes the goods in stock without the creditor, the DP is overstated because unpaid stock is being treated as paid. If the borrower excludes the goods from stock to match the creditor position, the physical count will show a surplus that the auditor will question. |
| 5 | The borrower has inventory at a third-party cold storage facility that is 200 kilometres from the factory. The value is Rs 65 lakhs. The auditor wants to visit the cold storage for physical verification. The borrower knows the cold storage facility is poorly maintained and the stock may show some deterioration that does not affect its saleability but will look bad in the auditor’s photographs. | If the borrower facilitates the visit, the photographs may trigger observations about storage conditions that the borrower considers cosmetic. If the borrower discourages the visit, the auditor may note that verification at the remote location was not facilitated, which looks worse than any photograph would have. |
| 6 | A related-party company owes the borrower Rs 85 lakhs. The amount has been outstanding for 150 days. The borrower knows the related party will pay, it is a group company controlled by the same promoter but the auditor is treating it as a doubtful receivable and wants to exclude it from DP. The borrower’s actual cash flow plan depends on this Rs 85 lakhs being part of the DP. | If the amount is excluded, the borrower faces an immediate DP shortfall and may not be able to meet its working capital needs for the month. If the borrower pushes back and the auditor includes it, the bank’s DP rests on a related-party receivable that a credit officer would likely question anyway. |
| 7 | The borrower operates from four locations. The sanction letter lists three locations as hypothecated premises. The fourth location was added six months ago and the hypothecation agreement has not been amended to include it. Stock worth Rs 45 lakhs is at the fourth location. | If the borrower discloses the unamended hypothecation, the bank may exclude Rs 45 lakhs from DP and may also question why the borrower did not amend the agreement six months ago. If the borrower does not disclose it and the auditor does not check the hypothecation agreement against the location list, nobody catches it, until something goes wrong. |
| 8 | The borrower’s insurance policy is about to expire in 10 days. The renewal premium has not been paid because of a temporary cash flow squeeze. The auditor is conducting the verification today and the policy is technically valid. But in 10 days it will lapse. | If the borrower says nothing, the report will note that insurance is valid as on the audit date, technically correct but practically misleading. If the borrower mentions the upcoming lapse, the auditor may note it and the bank may insist on immediate payment of the premium, adding to the cash flow pressure that caused the delay in the first place. |
Part B: Dilemmas the Stock Auditor Faces
| # | The Dilemma | What Makes It Difficult |
| 9 | The borrower’s finished goods include Rs 25 lakhs of goods that are technically within their shelf life but are clearly not selling. The market has moved on. The borrower insists they are saleable at full price. The auditor has no independent market data to prove otherwise. The sanction letter defines slow-moving as “no movement for 180 days.” These goods had a small transaction 170 days ago – technically not slow-moving under the sanction letter definition. | The auditor’s gut says these goods are not worth their carrying value. The sanction letter’s mechanical definition says they are eligible. Following the sanction letter protects the auditor procedurally. Following the gut protects the bank substantively. The two do not align. |
| 10 | During physical verification, the auditor notices that the actual stock looks significantly less than what the stock register shows. But the count is not complete, only 60 percent of the items have been counted so far and the remaining 40 percent are in a different section of the warehouse that has not been accessed yet. The borrower’s warehouse manager says the balance is in the other section. | If the auditor stops and reports a shortage based on 60 percent of the count, the finding may be premature, the remaining 40 percent may well make up the difference. If the auditor waits for the full count and the remaining section turns out to be nearly empty, the auditor has lost the element of surprise and the borrower may have had time to arrange a cover story. |
| 11 | The bank’s allotment letter says the auditor should “verify the stock and compute the DP.” The format provided by the bank includes a section on “compliance with sanction terms and covenants.” The auditor discovers that the borrower has breached a financial covenant (current ratio has fallen below the prescribed minimum). This is neither a stock issue nor a DP issue but it is right there in the bank’s own format. | If the auditor reports the covenant breach, the auditor is stepping into territory that arguably belongs to the bank’s internal monitoring or the statutory auditor. If the auditor ignores it even though the bank’s own format has a section for it, the auditor has left a section of the prescribed format blank without explanation. |
| 12 | The auditor is conducting a stock audit for Bank A, which is a consortium member. During the engagement, the borrower mentions that Bank B (another consortium member) has recently classified the account as SMA-1. Bank A is still treating the account as Standard. The auditor’s engagement is with Bank A, and the report is addressed to Bank A. | If the auditor mentions the SMA-1 classification by Bank B, the auditor is reporting information obtained from the borrower about another bank’s internal classification, information the auditor has no way of independently verifying. If the auditor does not mention it Bank A may not know that a consortium partner has already flagged the account and the stock audit report will present a picture that is more comfortable than the reality. |
| 13 | The borrower’s promoter takes the auditor aside during the engagement and says, quietly, “Please do not mention the related-party receivables in the report. We will clear them before the next quarter. If you mention them now, the bank will create trouble and the entire review will get complicated.” The promoter is polite, not threatening, and the request is framed as a practical business consideration. | The ICAI Code of Ethics is clear, the auditor cannot suppress a material finding but the auditor also knows that the promoter’s concern is not unreasonable on its face, the receivables may indeed be cleared next quarter. Reporting them will create friction with the borrower that may affect the auditor’s future assignment. Not reporting them is a professional and ethical violation. |
| 14 | The auditor computes the DP and finds the account is overdrawn by Rs 55 lakhs. The borrower’s CFO produces a revised stock statement that reclassifies Rs 30 lakhs of stores and consumables as raw materials, and adds Rs 25 lakhs of “goods in transit” supported by a supplier’s dispatch advice but no transporter’s receipt. With these adjustments, the DP shows the account exactly within limits. | If the auditor accepts the reclassification and the goods in transit without LR, the DP comes out clean but the auditor has accepted adjustments that are at best questionable and at worst fabricated. If the auditor rejects them, the account is reported as overdrawn and the borrower will almost certainly escalate the matter to the bank’s branch manager, who may pressure the auditor to “reconsider.” |
| 15 | The auditor’s team has completed the verification and the DP computation shows a comfortable position. But the auditor personally feels that the inventory quality is poor, too much of it looks old, dusty and unlikely to sell at anything close to carrying value. There is no specific observation that can be pinned down to a rupee figure. It is a professional instinct born of experience, not a quantifiable finding. | Reporting a “feeling” in a stock audit report is not professional. But ignoring an experienced auditor’s instinct means the report presents a picture that the auditor does not actually believe in. There is no framework for reporting professional unease that is not supported by specific, quantifiable findings. |
| 16 | The auditor finds that the borrower’s method of computing stock value differs from the method implied by the sanction letter. The borrower values finished goods at selling price less estimated margin (a top-down approach). The sanction letter says “cost or NRV, whichever is lower.” The borrower’s method may produce a higher or lower figure depending on the margin assumptions. The borrower has been using this method for years and no previous stock auditor has questioned it. | If the auditor insists on the sanction letter method, the DP changes, possibly significantly, and the borrower will argue that the method has been accepted by the bank for years. If the auditor accepts the borrower’s method because it has precedent, the auditor is knowingly departing from the sanction letter terms. Being the first auditor to raise a long-standing issue is professionally lonely. |
| 17 | Two consortium banks have appointed two different auditors for the same borrower for the same quarter/ period. Both auditors verify the same stock on different dates. Their reports show different DP figures because they visited on different dates, applied different interpretations to the same sanction letter clauses and made different professional judgments about the same slow-moving stock. The bank asks: which report is correct? | Both reports are “correct” within the professional judgment of each auditor but the bank cannot act on two different numbers. The divergence is not an error by either auditor, it is a consequence of the judgment-based nature of the engagement. Neither auditor can be asked to change their figure to match the other’s without compromising their independence. |
| 18 | The auditor has been conducting the stock audit for this borrower for three consecutive/ alternate period. The auditor knows the business well, understands the inventory and has a productive working relationship with the borrower’s accounts team. But the auditor is now so familiar with the operations that the verification has become somewhat routine, the auditor knows where the stock is, knows what the numbers usually look like and has stopped asking the probing questions that a fresh auditor would ask. | Continuity brings efficiency and deep understanding. It also brings complacency. The auditor’s effectiveness may be declining even as the auditor’s comfort is increasing but requesting rotation means losing a good engagement and the bank values continuity because the auditor’s institutional knowledge reduces the risk of errors. |
Part C: Dilemmas the Banker Faces
| # | The Dilemma | What Makes It Difficult |
| 19 | The stock audit report shows the account is overdrawn by Rs 55 lakhs. The borrower has been a good customer for 15 years. The branch manager knows the business is fundamentally sound and the overdrawn position is temporary and it will correct itself when a large receivable is collected next month. But the report is on file. The credit monitoring system has flagged the account. Head office is asking for an explanation. | If the branch acts on the report and recalls the excess drawing, the borrower’s operations get disrupted, which may create the very stress that the branch is trying to avoid. If the branch ignores the overdrawn position and waits for the receivable to come in and it does not come in, the branch has a report on file showing the account was irregular and no action was taken. |
| 20 | Two stock audit reports from two different auditors for the same borrower in the same period show DP figures that differ by Rs 40 lakhs. One auditor has excluded certain stock categories that the other has included. Both cite the same sanction letter. The credit officer must decide which DP figure to use for monitoring. | Choosing the lower figure is conservative but may trigger an unnecessary overdrawn position. Choosing the higher figure is borrower-friendly but relies on the more generous interpretation. Averaging the two is mathematically convenient but professionally meaningless. Asking both auditors to reconcile their differences is logical but practically difficult and time-consuming. |
| 21 | The stock audit report is clean. The DP is comfortable. The observations are minor. But the bank’s concurrent auditor has separately noted that the borrower’s cash flows have been weakening, the promoter has been pledging personal shares and a key customer has recently been classified as NPA by another bank. None of this is in the stock audit report because none of it is within the stock auditor’s scope. | The stock audit report gives the credit officer comfort on the security position. The concurrent audit gives discomfort on the broader credit picture. Acting on the concurrent audit findings means ignoring the clean stock audit report. Acting on the stock audit report means ignoring the concurrent audit concerns. The credit officer must synthesise two reports that paint very different pictures. |
| 22 | The stock audit report identifies related-party receivables of Rs 95 lakhs and presents the DP both with and without them. The bank’s credit policy says related-party debtors should be excluded but the borrower has been including them for the last three years and no previous stock auditor flagged them. If the bank now excludes them the account immediately becomes overdrawn and the borrower will argue that the bank accepted these receivables for three years and cannot suddenly change the treatment. | If the bank enforces its own policy now, the borrower has a legitimate grievance about inconsistent treatment. If the bank continues to include the related-party receivables because it always has, the bank is knowingly violating its own credit policy based on precedent rather than principle. Three years of non-enforcement does not change what the policy says. |
| 23 | The bank has a tight deadline for submitting stock audit reports to the regional office. The auditor submits the report two days late. The report is well-prepared and thorough. A different auditor submitted the report for another account on time, but the report is superficial, with a single-page DP computation and no observations. The regional office tracks only the submission date, not the report quality. | If the bank penalises the late auditor, it discourages thoroughness in favour of speed. If the bank penalises the superficial auditor, the empanelment metrics do not capture quality – only timeliness. The bank’s monitoring system rewards the behaviour it measures and not the behaviour it needs. |
| 24 | The stock audit report recommends excluding Rs 30 lakhs of inventory from the DP because the BIS certification for that product has expired. The branch manager knows the borrower has applied for renewal and it will come through in a few weeks. If the branch enforces the exclusion, the account becomes overdrawn and the borrower may shift to a competing bank. If the branch waits for the renewal, the branch is sitting on a report that says the DP is overstated by Rs 30 lakhs and doing nothing about it. | The branch manager’s business judgment says the BIS renewal is imminent and the exclusion is temporary. The stock audit report says the inventory is currently ineligible. The credit monitoring policy says the branch should act on the report. The relationship management instinct says acting immediately may cost the bank a good customer. |
| 25 | The bank receives a stock audit report that is exceptionally detailed, 40 pages, comprehensive observations, every exclusion documented, every limitation disclosed, every related-party transaction mapped. The credit officer finds it overwhelming. The previous auditor’s reports were 8 pages, clean and simple. The branch prefers the old format. The detailed report is objectively more useful but subjectively harder to process. | The bank appointed the auditor to provide thorough reporting. The auditor has delivered exactly that but the bank’s operational reality is that credit officers handle dozens of accounts and cannot spend 45 minutes reading one stock audit report. The detailed report sits unread in a file, its value unrealised. The brief report gets read but provides less protection. |
Why I am not offering solutions
I have thought about whether this article should include a recommended approach for each dilemma. I decided against it, for three reasons.
First, dilemmas are fact-specific. The right course of action for dilemma number 9 depends on whether the sanction letter gives the auditor discretion beyond the mechanical 180-day definition, what the bank’s internal policy says about auditor judgment versus mechanical criteria and what the specific goods are and what their market looks like. An answer that fits a textile manufacturer’s finished fabric does not necessarily fit a pharmaceutical manufacturer’s formulated products.
Second, dilemmas involve trade-offs, not solutions. When the borrower’s promoter asks you to suppress a finding, the choice is not between a right answer and a wrong answer. The choice is between professional integrity (which protects your standing but damages the relationship) and commercial accommodation (which preserves the relationship but creates professional risk). Both paths have real consequences. Pretending that one path has no downside is dishonest.
Third, dilemmas are where professional judgment lives. If every situation had a clear, prescriptive answer, stock audits could be done by a checklist and the profession would not need experienced practitioners. The reason experience matters, the reason a 600+ audit veteran approaches these situations differently from a first-year, is that the veteran has encountered these dilemmas before, has seen the consequences of different choices and has developed a calibrated sense of which trade-offs are acceptable and which are not. That calibration cannot be transferred through an article. It comes from practice.
What I hope this article does is something different. I hope it gives every borrower, every stock auditor and every banker permission to acknowledge that these situations exist, that they are genuinely difficult and that the discomfort they create is not a sign of incompetence but a sign that the professional is paying attention to the complexity of the engagement.
The auditor who has never felt uncomfortable during a stock audit has either been extraordinarily lucky or has not been looking hard enough.
Disclaimer and Limitation
The views expressed in this article are the personal views and professional observations of the author. They are not intended to constitute legal advice, regulatory guidance, or a definitive interpretation of any law, rule, standard, or professional pronouncement.
The dilemmas described are illustrative scenarios based on the author’s experience across multiple engagements and sectors. They do not refer to any specific borrower, bank, auditor, or engagement. Any resemblance to a specific situation is coincidental.
This article deliberately does not provide solutions or recommended approaches. The appropriate response to each dilemma depends on the specific facts, the applicable engagement terms, the relevant ICAI pronouncements and the professional judgment of the practitioner. Readers are advised to exercise their own professional judgment and to seek appropriate guidance when faced with situations similar to those described.
Nothing in this article supersedes any ICAI pronouncement, Standard on Auditing, statutory provision, RBI direction, or bank policy. The applicable framework shall prevail in all cases.
The author accepts no liability for any consequence arising from the interpretation or application of any content in this article.
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